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REPORTABLE

   IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL No.   9417  OF 2019 (ARISING OUT OF SPECIAL LEAVE PETITION (C) NO. 4074 OF 2018)

M/S DAFFODILLS  PHARMACEUTICALS LTD. & ANR.                ...APPELLANT(S)

VERSUS

STATE OF U. P. & ANR.                                         ...RESPONDENT(S)

J U D G M E N T

S. RAVINDRA BHAT, J.

1. Leave granted.  With consent, all counsel who appeared were heard.

2. The  appellant  (hereafter  “Daffodills”),  a  pharmaceutical  supplier,  is

aggrieved by a decision of the Allahabad High Court, rejecting its challenge to

an order (dated 21.08.2015) issued by the Principal Secretary, Government of

U.P. to its Medical and Health Department, directing it to stop local purchase

from the appellant.   Daffodills had participated in a tender process, in which the

state called for bids from interested parties, willing to supply various categories

of  pharmaceutical  products.   The  successful  bidder  was  required  to  supply

medicines to  various hospitals,  under  the control  of  the Medical  and Health

Department, U.P. for one year. Daffodills was one amongst 56 bidders; its bid

was acceptable to the respondent, i.e. State of U.P.

3. Daffodills was asked to match its previous bid to the Tamil Nadu Service

Corporation  Ltd.  for  the  year  2015-16,  at  approved  L1  rates,  on  or  before,

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29.05.2015 in respect  of  14 specified drugs.  At  the  time of  bid submission,

every tenderer/bidder had to furnish a declaration to the following effect:

“Firms should give an affidavit that there is no Court Case/Vigilance Case/CBI Case pending against the firm.  All the documents given in the tender are true.  If found false/fake the person/firms will have to be accepted by the firm.  (Court case means “Criminal Case” against firm/board  of  Director/Directors/principal  stock  holder  as  per relevant law)”.

It is not disputed that Daffodills furnished the required declaration in terms of

the tender.

4. While so, on 21.08.2015, the impugned letter/notice was issued by the

Principal Secretary to the Government of U.P. stating that a first information

report (FIR) had been lodged against Daffodills alleging that it had committed

offences, and that the Central Bureau of Investigation (CBI) was inquiring into

the issue.  Accordingly, the offices under Department of Health was directed to

desist  and stop all  procurements from the appellant, i.e. Daffodills under the

following terms:

“I am directed to say in the described situation that no more local purchase is to be done till pre order of the government, from the above said firms which are under the investigation of  CBI in the NRHM Case, by the hospitals at the rate of contract of DGS&D/ESIC and Tamil Nadu Medical Services Corporation.  If medicine is purchased by any hospital in-charge from these firms without approval of  the government  then strict  action  would  be taken as  per  rules  against him.”

5. Complaining  of  arbitrariness  on  various  grounds,  (including  that  the

impugned direction not to procure or purchase medicines issued against it, was

on  a  mistaken  assumption  that  a  criminal  case  was  pending  against  it),

Daffodills submitted that the criminal case was filed against one Mr. Surender

Chaudhary, an erstwhile Director, who had ceased to have any connection with

it (i.e.  Daffodills) from 22.02.2012. Besides, it was argued that the decision not

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to procure, amounted to blacklisting and that it was issued without notice or pre-

decisional hearing and was consequently liable to be set aside.

6. In the impugned order, the High Court recalled a previous direction in

other proceedings, i.e. Writ Petition No. 3611 (MB)/ 2011 where it had enquired

in regard to  the execution and implementation of  the National  Rural  Health

Mission in regard to utilization of funds released by the Government of India.

The impugned order states that in compliance of that order, CBI registered a

case  for  preliminary  inquiry  and  after  concluding  the  investigation  filed  a

charge-sheet  in  the  competent  court  against  Surender  Chaudhary,  the  then

Director of Daffodils and other co-accused.

7. After noticing Daffodil’s contention that Surender Chaudhary ceased to

be its Director and also that it was not given opportunity of hearing before the

passing of  the order,  the High Court  observed that  in matters  of  contractual

disputes relating to policy decisions, the scope of jurisdiction under Article 226

is limited and  therefore, it could not be assumed that the action of the State

Government was unreasonable or contrary to public interest.  Dealing with the

complaint of breach of principles of natural justice, the High Court was of the

opinion that such principles cannot be placed under a straight-jacket formula

and  consequently,  Daffodills’ failure  to  comply  with  express  terms  of  the

contract and its breach of the terms resulted in the State resorting to recalling its

business  through  various  directions  to  State  Agencies.  The  High  Court,

therefore, concluded as follows:

“32.  It  is  clear  that  when  there  is  a  failure  on  the  part  of  the contractor  to comply with the express terms of the contract and/or to commit  breach  of  the  said  terms  resulting  into  failure  to commence/execute the work or supply the items as per specification as stipulated in the agreement or giving the performance that does not meet the statutory requirements of the contract or the action of the petitioner is reported against the provisions and against the interest of the State, the Department has a right to regulate its business through

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various directions to State Agencies in which the petitioner has no right to interfere.

8. It  is  argued  on  behalf  of  Daffodills  that  the  impugned  decision  is

erroneous because the High Court  overlooked a salient  aspect,  i.e.  Surender

Chaudhary has resigned as Director, way back in 2012.  Therefore, his being

implicated in the criminal case could not have resulted in an adverse impact on

the business of Daffodills,  i.e.  the appellant.   It  was argued furthermore that

besides an unwarranted and arbitrary action against the company on account of

the acts and omissions of its erstwhile Director, the High Court committed an

error in overlooking binding decisions of this Court (including Rastriya Ispat

Nigam v.  Verma (2006) 7 SCC 275 and Kalja Industries v.  Western Telecom

(2014)  14  SCC  731),  which  clearly  held  that  before  proposing  to  pass  a

blacklisting or debarring orders, the parties had to be given hearing followed by

an appropriate reasoned order.

9. It was argued on behalf of the State that the order made by it directing the

officials of the Health Department to discontinue procurement, does not amount

to a debarring order.  It was urged that Surender Chaudhary was acting in the

capacity of Director of Daffodills, for which he was charged of various offences

by the CBI.  These involved fictitious accounts of supply to various individuals

and  persons  in  order  to  obtain  procurement  orders  from  the  State.   The

concerned  clause  14  clearly  stated  that  a  court  case  means  “criminal  case”

against  the  firm,  Board of  Directors  or  individual  Directors.   Therefore,  the

involvement of Surender Chaudhary was close, who was none other than the

blood relative of the existing director, the appellant’s contention that the acts of

omission and commission did not in any manner affect it, is not sound.  Learned

counsel  submitted  that  having  regard  to  these  facts,  the  order  made  by  the

Principal  Secretary  (on  21.08.2015)  was  only  a  direction  to  not  procure

medicines  locally  from  the  appellant;  it  could  not  be  characterized  as  a

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debarring or blacklisting order.  It was pointed out that the appellant had filed a

suit in 2014, seeking a direction not to finalize the tender for which it had bid;

furthermore, the order dated 21.08.2015 was made pursuant to the directions of

the court.  Consequently, the appellant could have no grievance against it.

10. Daffodills  had  bid  for  the  contract,  (as  is  evident  from  the  factual

narration), to supply various categories of medicines to the Health Department

of the State of U.P.   One of the terms of the tender conditions required each

bidder to declare that no criminal case was pending against it.  The appellant,

Daffodills,  had  approached  the  Allahabad  High  Court,  complaining  of

arbitrariness  on  account  of  the  State’s  decision  to  reject  its  bid,  by  filing  a

previous Writ Petition No. 35253/ 2015. This was dismissed.

11. The Allahabad High Court held that in the facts and circumstances of the

case there was no illegality in exclusion of the petitioner, i.e. Daffodills from the

tender  for  supply  of  medicines  and  in  fact,  debarring  procurement  from

Daffodills was made after the order of the Allahabad High Court dismissing the

Writ Petition, challenging the rejection of Daffodil’s tender.

12. Although  in  the  proceedings,  it  appears  that  the  suit  was  filed  by

Daffodills at some stage against the finalization of tender (issued in 2014) it is

not clear whether the suit was withdrawn, in the wake of the filing and dismissal

of its writ petition in 2015.  What is clear, though from the narrative is that

before the order of 21.08.2015 was made, no show-cause notice or opportunity

was granted to the appellant to represent against the proposed action.

13. Although, State of U.P. has argued that the impugned order requiring that

no procurement ought to be made from Daffodills, is neither a blacklisting nor a

debarring order, in our opinion, in fact and in reality, that order is nothing but an

order  or  a  directive,  debarring  and preventing  the  State  of  U.P.   from local

purchase  of  medicines  from  Daffodills  for  an  indefinite  duration.   Unlike  a

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“normal” blacklisting order which has a finite life span (of three or maximum

five years), the indefinite directive (which appears to be co-terminus with the

lifetime  of  the  criminal  case)  is  facially  far  more  disproportionate  than  a

blacklisting order.  Even as on date, it is not clear whether formal charges have

been framed against the accused i.e. Surender Chaudhary.

14. The decisions in Erusian Equipments and Chemicals Ltd. v. State of West

Bengal1 and  Raghunath  Thakur  v.  State  of  Bihar  & Ors2  as  well  as  later

decisions3 have now clarified that before any executive decision maker proposes

a drastic adverse action, such as a debarring or blacklisting order, it is necessary

that opportunity of hearing and representation against  the proposed action is

given to the party likely to be affected.  This has been stated in unequivocal

terms in Raghunath Thakur (supra) as follows:

“  20 .  Blacklisting  has  the  effect  of  preventing  a  person  from the privilege and advantage of entering into lawful relationship with the Government for purposes of gains. The fact that a disability is created by the order of blacklisting indicates that the relevant authority is to have an objective satisfaction. Fundamentals of fair play require that the person concerned should be given an opportunity to represent his case before he is put on the blacklist.”  

In Southern Painters (supra) the grievance was with respect to unilateral

deletion  of  the  petitioners’  name  from  the  list  of  approved  contractors,

maintained by the public sector agency. This court held that such an action was

arbitrary:  

“The  deletion  of  the  appellant's  name  from  the  list  of  approved contractors  on  the  ground  that  there  were  some  vigilance  report against  it,  could  only  be  done  consistent  with  and  after  due compliance  with  the  principles  of  natural  justice.  That  not  having been done, it requires to be held that withholding of the tender form from the appellant was not justified. In our opinion, the High Court

1 1975 (1) SCC 70 2 1989 (1) SCC 229 3 Southern  Painters  v.  Fertilizers  &  Chemicals  Travancore  Ltd.,  1994  Supp  (2)  SCC  699;  Grosons Pharmaceuticals (P) Ltd. v. State of U.P.,(2001) 8 SCC 604; B.S.N. Joshi & Sons Ltd. v. Nair Coal Services Ltd. (2006) 11 SCC 548

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was not justified in dismissing the writ petition.”  

15. In the present case, even if one assumes that Surender Chaudhary, the

accused in the pending criminal case was involved and had sought to indulge in

objectionable  activities,  that ipso  facto  could  not  have  resulted  in  unilateral

action of the kind which the State resorted to- against Daffodils,  which was

never granted any opportunity of hearing or a chance to represent against the

impugned order. If there is one constant lodestar that lights the judicial horizon

in this country, it is this: that no one can be inflicted with an adverse order,

without being afforded a minimum opportunity of hearing, and prior intimation

of such a move. This principle is too well entrenched in the legal ethos of this

country to be ignored, as the state did, in this case.

16. The High Court, in the opinion of this court, fell into error in holding that

in matters of award of public contracts, the scope of inquiry in judicial review is

limited.  Granted,  such jurisdiction  is  extremely  circumscribed;  no  doubt  the

court  had  refused  to  grant  relief  to  Daffodils  against  its  plea  of  wrongful

rejection of its tender. However, what the impugned judgment clearly overlooks

is that the action of the state, not to procure  indefinitely, on an assumption of

complicity by Daffodils, was in flagrant violation of principles of natural justice.

17. Normally,  this  court  would  have  quashed  the  Government  of  U.P.’s

decision, and left it to grant a hearing to Daffodils, before taking any action.

However,  given  that  the  impugned  order  of  debarring  (i.e.  directive  not  to

procure locally from Daffodills) was made over 4 years and 3 months ago, this

court is of the opinion that it  would be in the overall  interest of justice that

appropriate  relief  is  granted.   Accordingly,  the  said  order  of  the  Principal

Secretary,  Government  of  U.P.  directing  all  concerned  departments  to

desist  from  resorting  to  local  purchase  from  the  appellant  is  hereby

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quashed. The impugned judgment of the High Court is hereby set aside. The

appeal is allowed in the above terms. No costs.

.…....................…….....................J.                                               [R. F. NARIMAN]     

………….......................................J.                                           [S. RAVINDRA BHAT]

New Delhi, December 13, 2019.